Why the Quality of Your Verifications Determines the Strength of Your Receivables—Part 2

Written by: Scot Pierce, Esq., Partner, Whitaker Chalk Swindle & Schwartz PLLC

This is a continuation of the previous article published in November. As we move from the principles outlined in Part 1 to the practical guidance in Part 2, we shift from understanding why verifications matter to understanding what makes a verification strong. We will discuss how weaknesses in the verification process can undermine your legal position, limit your leverage, and expose you to avoidable losses. Part 2 walks you through the different levels of verifications and explains how each performs when a dispute arises.

It may sound a bit simplistic, but I categorize verifications into tiers—gold, silver, bronze, and aluminum—based on the legal protection they provide, and the defenses commonly raised against them. You may not always be able to obtain the strongest verification and may choose to accept a riskier verification for business reasons. But you should understand those risks before deciding what you are willing to accept.

The Gold Standard: Estoppel Letters

In my opinion, the most reliable method of verification is the estoppel letter. I only have room here for an overview, but this topic warrants a full article of its own. An estoppel letter is a formal written acknowledgment by the account debtor that the receivable is valid, undisputed, and enforceable. When drafted correctly, it can be enforceable under UCC 9-403 and/or as a contract. The letter not only verifies the obligation but also legally binds the account debtor to its representation. If the debtor later disputes the receivable, you can pursue a cause of action for breaching the estoppel letter. Depending on your drafting, the letter may also provide a home-court advantage for litigation.

Estoppel letters, however, are not foolproof. I have litigated several cases involving enforcement of these letters, and the two challenges that arise most often relate to arguments over authority and consideration. Account debtors commonly argue that the person who signed the letter lacked authority. We covered authority arguments in Part 1, so I will not repeat it here.

Consideration also presents challenges. Courts may question whether both parties received a benefit from the letter since without mutual consideration the agreement cannot be enforceable. This issue varies by jurisdiction. Judges in states that take a more active role in scrutinizing transactions are more likely to be sympathetic to finding a lack of consideration, whereas courts in more contract-friendly jurisdictions tend not to second-guess the parties’ deal. Purposeful drafting may help resolve consideration problems.

While some attorneys disagree about the effectiveness of estoppel letters because of these challenges, I have found them to be highly effective and often lead to favorable resolutions.

The Silver Standard: Clear and Detailed Writings

The next best verification is a clear, detailed email or written communication from the account debtor confirming that the account is valid, undisputed, and will be paid on time and in full. Although less formal than an estoppel letter, a thorough written confirmation provides strong evidence that the debt is valid. It remains highly effective for holding the account debtor liable.

Authority concerns still apply, as discussed earlier. Ambiguous language also creates opportunities for disputes about what the debtor actually meant. Incorrectly verifying that an invoice is ready for payment may even put the account debtor’s employees at risk of discipline or termination, giving the employees an incentive to deny or reinterpret what they wrote.

The best of these verifications are unambiguous, comprehensive, and sent by someone with unquestionable authority to bind the company.

The Bronze Standard: Vague or Incomplete Writings

A tier below are emails or writings that provide some verification but use vague, incomplete, or easily misinterpreted language. For example, a debtor may confirm that invoices were “received” without stating that they are valid, undisputed, and due. Courts frequently interpret these types of communications differently than factors do.

For instance, in DS Trade Concepts v. Atalanta, 516 F. Supp. 3d 396 (D.N.J. 2021), one of the disputes involved a factor arguing that the account debtor was barred from asserting offsets for lack of delivery because it had already verified the invoices. The court read the verifications differently, finding that confirming the “validity” of invoices did not mean the invoices were due and payable, nor did it amount to estoppel representations under 9-403. Regardless of whether the court was correct, the point is the wording left room for interpretation which is something you want to avoid.

These sorts of verifications often arise with online portals. Instead of receiving a direct response from the debtor to an inquiry, a factor accesses a portal that lists invoices and displays statuses such as “In Process” or “Approved.” But what does “Approved” mean? Approved for payment? Approved for internal review? Approved for submission to another department? The meaning can be highly fact-specific and open to dispute.

Prior course of dealing can help. If you have been relying on these portal updates for weeks without issue, and suddenly the debtor refuses to pay, that history may persuade a court that “Approved” means approved for payment.

Also remember that if you are an authorized portal user, the portal’s terms of use may create problems. They may define what “Approved” means or reserve the right to audit invoices even after approval. It is worth reviewing these terms to identify any issues they might create.

The Aluminum Standard: Telephone Verifications

At the lowest tier are telephone verifications. Unless the call is recorded, this method carries little weight in court. And whether you may record a call depends on state law since some states require only one-party consent, while others require all-party consent.

Even recorded calls are subject to disputes over context or the caller’s authority. Unrecorded calls create even bigger problems because the person who verified the account rarely agrees with the factor’s recollection of the call. This creates factual disputes that make recovery uncertain and prolongs litigation. Compounding the issue is the incentive for the debtor’s employee to deny what was said since incorrectly verifying an invoice can lead to discipline or termination as discussed earlier.

Conclusion

Verifications are not just administrative housekeeping. They are an important part of your risk management when purchasing a receivable. A well-drafted estoppel letter may transform an ordinary verification into a binding representation that gives you contractual remedies and litigation leverage.

When a formal estoppel letter is not available, a clear and detailed written verification is the next best option. In contrast, vague writings and oral verifications create ambiguity that exposes you to unnecessary risks. Ultimately, verification is not a mere box to check. It is a safeguard that often determines whether your rights are enforceable or illusory. Strong verification practices not only prevent disputes but also help you get paid more reliably and more quickly.

About Scot Pierce

Scot Pierce is a proud Fort Worth native and an experienced commercial litigator, corporate finance, and bankruptcy attorney.  A large part of his practice is dedicated to representing contractors, businesses, financial entities and secured creditors.

Before returning to Fort Worth in 2002, Scot worked as a Dallas County Assistant District Attorney where he tried over 60 jury trials and numerous bench trials. He has been voted one of the Top Attorneys in Fort Worth by Fort Worth, Texas Magazine and 360 West Magazine for several years. Scot is also listed as an AM Best “recommended Insurance Attorney.” A prolific writer and speaker, Scot received an award in 2010 from the State Bar of Texas for Best Series of Articles – Substantive Law for his articles on creditor rights.  For his insurance clients, Scot is also set up for billing both under Legal Software Systems, Inc. billing system (LSS) and Legal Express billing system (LegalEx).

Scot has extensive experience in single-family, multi-family and commercial construction cases representing both general contractors and subcontractors in litigation and arbitration around the state of Texas.

The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.